Anyone might give a helping hand to struggling musicians, hungry journalists or stranded students. But bankers? If there is more compelling evidence of a selfless heart on the part of Conrad Black, it’s hard to imagine what it would be.
Conrad Black’s defence team has filed statements and letters from family and supporters as part of its pre-sentencing submissions to U.S. federal court judge Amy St. Eve. There are the usual flattering accolades that are to be expected about how the sick were helped and the broken mended. Some of the claims are no doubt true. But it is also true that the rich and powerful often see the conduct of one of their own through a lens that magnifies the positive and clouds the disagreeable.You may recall that similar glowing character references were made about one-time hockey impresario Alan Eagleson, another holder of the famed Order of Canada who was stripped of the honor prior to his incarceration. He was charged with and eventually pled guilty in 1998 to mail fraud in the United States and fraud and embezzlement in Canada. The effusive testimonials, which, like Mr. Black’s, included a supportive letter from a former Canadian prime minister, did not stave off a loss of freedom.Many of the statements made on behalf of Mr. Black seem at odds with the public persona his own words have created. Still, little in life is entirely black or white. No doubt there are many admirable sides to Mr. Black in his roles as a father, husband, friend and parishioner, as my about-to-turn 86-year-old mother dutifully reminds me whenever the subject of Mr. Black’s travails comes up at family occasions. While Mr. Black’s lawyers have gone to predictable lengths to portray a kinder and gentler man, one item that may well prove evidence of an almost super human level of generosity was contained in the last word of a sentence on page 31 of the defence’s filing.
He supported musicians, artists, aspiring journalists, students and bankers.
Anyone might give a helping hand to struggling musicians, hungry journalists or stranded students. But bankers? Surely it was a typo that was meant to say bakers. The doughnut business has begun to sag as trans fats have become passé and the numbers at Krispy Kreme have turned unappetizing to investors. But it is hard to imagine that anything short of a Mother Teresa-like spirit of altruism could make a man warm to bankers, who, popular opinion decrees, rarely give a second thought about calling in a loan or foreclosing on a widow’s home. If there is more compelling evidence of a selfless heart on the part of Conrad Black, it’s hard to imagine what it would be. True, one has to stretch one’s mind to fathom why bankers would need to seek out Mr. Black’s assistance in the first place. But then there are those who leave their jobs a little early, as Charles O. Prince did a few weeks ago on the heels of the multi-billion dollar subprime mortgage losses at Citigroup. There is always room to top a $60 million dollar style severance package.Perhaps those qualities of patience, tolerance and charity that Mr. Black has shrouded so well in his public statements regarding Hollinger shareholders (“…we think they are a bunch of self-righteous hypocrites and ingrates…”), or servants (“A notoriously unreliable group, as any experienced employer of such people knows.”), or journalists (“The ‘profession’ is heavily cluttered with abrasive youngsters who substitute ‘commitment’ for insight, and to a lesser extent, with aged hacks toiling through a miasma of mounting decrepitude. Alcoholism is endemic in both groups.”) have belied the real person. Among his uncommon gifts we can now count a willingness to see the human side of needy bankers.I shutter at what my mother will think when she hears about this. She has been willing to give a maternal benefit of the doubt to Conrad Black, remembering fondly her days of driving along The Bridle Path by his family home. She is not as forgiving in her views about bankers.
Seventy–six years ago, the business world was rocked by another sensational trial involving corporate fraud and the scamming of investors with a prominent baron at the centre of the scandal. It did not end well for Lord Kylsant of Carmarthen. The uncanny similarities are not encouraging for Lord Black of Crossharbour.
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Considerable speculation is gathering about what will become of Conrad Black in light of his four-count felony conviction earlier this month. In that regard, the past provides a useful and rather unexpected guide. Corporate governance, which I think factored significantly in the outcome of the case against Mr. Black and his colleagues and set the stage for their eventual downfall (I will have a further posting on this in light of the verdict) actually has a history, though most of its champions don’t bother to study it.
Two decades ago, I came across a case involving boardroom misfeasance by another British baron. I found it interesting when I first learned about it, but thought it was from a different and by-gone era. I had no idea it would someday spring from my archives and take on a totally modern face. Today, in the wake of recent developments in U.S. federal court in Chicago, it is truly fascinating for its uncanny similarities to Hollinger’s demise and for its instructive value as to what might lie ahead for Mr. Black. It is not a pretty picture.
Owen Philipps, who became Lord Kylsant of Carmarthen in 1923, was born to great wealth and a prominent family, like Lord Black of Crossharbour. His ancestry could be traced back to the nobility of post-Roman Wales. And like Lord Black, Lord Kylsant attracted early praise for his business acumen. He commanded enormous respect in commercial and political circles and was then, as his baronial counterpart is today, viewed as a larger-than-life figure. At six feet seven inches, he was straight out of central casting for that role. Like Lord Black, Lord Kylsant began to assemble an empire, not of newspapers, but of ships. An admirer of Bonaparte like Lord Black, Lord Kylsant became known as the Napoleon of the seas for his tenacity in making deals and expanding his empire and for an almost single-handed domination of his company. You have to wonder what this fascination of ill-fated business tycoons with the likewise ill-fated emperor, who was given to such monumental lapses in judgment, is really about. Perhaps they should have studied more Wellington and less his conquered opponent.
Lord Kyslant and Lord Black received their titles largely because of their business successes. Some good connections no doubt helped in both cases. Lord Kylsant’s huge ego —he, too, did not suffer mere mortals gladly— was illustrated by the equally oversized “K” which he scrawled on memos and company orders to signify his approval. Lord Black is known for signing his name to emails in all capital letters. And the two men held rare honors: Lord Kylsant was a Knight of the Order of St. John of Jerusalem; Lord Black is a Knight of the Order of St. Gregory the Great.
In 1926, the Royal Mail Steam Packet Company, which was publicly traded on the London Exchange and headed by Lord Kylsant, bought the White Star Line, which also owned the Titanic prior to its catastrophe-destined maiden voyage. The Royal Mail was essentially a holding company for various shipping entities, which continued to operate under their own corporate flag. Like Hollinger, the Royal Mail financed many of its acquisitions by taking on enormous amounts of debt, which later proved difficult to service. By the early 1930s, the company began to fall behind in its payments to the White Star’s former owners. Soon, investors were publicly questioning the Royal Mail’s accounting practices and whether the true state of its financial health was being disclosed. Lord Kylsant, like Lord Black, initially bristled at any suggestion of irregularities in his stewardship. But under mounting pressure, and in a move that presaged Lord Black’s own actions some seventy years later, the baron responded by agreeing to the creation of a special committee to investigate the company’s affairs. The highly respected Sir Josiah Stamp —the Richard Breeden of his time— eventually submitted a devastating report that showed the alarming extent of the company’s financial deterioration and found that investors had been misled.
Lord Kylsant soon took a leave of absence from daily management of the company. Still, a criminal investigation followed and, in a move that rocked both Britain’s financial community and aristocratic society, he was arrested and charged with two counts of fraud. The mirrors of history form an uncanny reflection of the proceedings in U.S. federal court against Conrad Black. In June of 1931 a trial began in London’s historic Guildhall. The country was spellbound. The courtroom was packed. The press from around the world followed every word, along with the comings and goings of Lord Kylsant and his family in their limousines. The best —and certainly most expensive— legal minds in England, perhaps even rivaling Lord Black’s fabled team of the Two Eddies (fabled, that is, before his four-count conviction), were retained by Lord Kylsant to marshal his defense. Hundreds of boxes of documents were introduced into evidence. Prominent directors testified —as they so often do in such cases— that they were not aware of what was really happening in the company. Lord Kylsant’s lawyers mocked their testimony and asserted the board was fully informed and approved of all financial transactions and disclosures. Sounds familiar, doesn’t it? A jury of ten men and two women (Lord’s Black’s was composed of nine women and three men) did not buy that line. The central issue was that Lord Kylsant deliberately hid the true state of the company’s finances from his board of directors and the shareholders. The verdict acquitted Lord Kylsant on one count of fraud and convicted him on the other. A sentence of one year in prison was imposed.
There was great speculation at the time, as there is today with Lord Black’s conviction, about the success of an appeal, which was launched immediately. Many assumed a prominent titled member of the aristocracy would do well before similarly privileged appeal court judges and that what were asserted by the baron’s supporters to be relatively minor infractions would not be deserving of incarceration. They were wrong.
When her husband’s appeal failed, Lady Kylsant, a much remarked about figure at the proceedings, broke down and embraced the emotional baron in his last moments of freedom. The sentence was upheld and ordered to commence immediately. And so it was that this lord of the oceans who commanded one of the largest fleets of British commercial ships to sail the seven seas was dispatched into the company of petty thieves, small-time criminals and household robbers. He never set foot in the House of Lords again. He was never entrusted with other people’s money again. All of Lord Kylsant’s significant honors, including the previously noted Order of St. John of Jerusalem, were rescinded in the months following his conviction. Struggling with public disgrace and social ridicule, not just because of his crime but also the legacy he squandered, he died a broken man in 1937. The Royal Mail sailed into virtual extinction, and the financially troubled White Star Line, which even the greatest calamity of the sea could not sink, was brought down by a scheming boardroom baron who plotted his misdeeds among mahogany tables, leather chairs and every privilege his country could bestow upon him.
The shareholders of Hollinger Inc. and Hollinger International may themselves be struck by the parallels in the demise of Lord Kylsant’s empire and the hollowed-out remains of what not long ago was the world’s third largest newspaper owner.
If, on a Christmas Eve in the late 1990s, before the twin vices of greed and miscreance had settled on Lord Black’s mind, the ghost of Lord Kylsant had been able to visit him, as Marley appeared to Scrooge in the Dickens tale, one wonders what he would have said. Would he have warned his modern equivalent to change his ways? Would he have counseled him that it profit a man nothing to gain a few dollars more only to lose his priceless freedom and precious reputation? Could anyone have persuaded an uncommonly determined man who rose from The Bridle Path to a British peerage to take a less ignoble path? Is it always the curse of larger-than-life men to surround themselves with smaller figures of little courage and a never-ending sense of obliging service? Or are there just so few men and women who will stand up to hold back the destructive tide of hubris and unquenched ego? Looking at the examples from as far back as the Royal Mail and as recent as Hollinger, a long series of rather remarkably ineffectual boardroom players, distinguished more by the outcome of their carelessness than by the product of their diligence, seems to lead to that conclusion.
It is perhaps not just Conrad Black who needs to reflect upon the events that have taken him to this regrettable point in his life. The experience carries valuable lessons for how we all deal with such titanic figures in the future, whether they be noble barons or just common variety CEOs who think they should be paid a king’s ransom.
Conrad Black is the only member of the House of Lords to be convicted of criminal charges involving a publicly traded company since 1931. It did not end well for Lord Kylsant of Carmarthen. One wonders what history will finally record in the case of Lord Black of Crossharbour.
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Whatever else it may be, the Hollinger saga has been another valuable lesson in how not to run a company —and in what kind of company investors should avoid.
Even before the outcome is known in the trial of Conrad Black and other former officers and directors of Hollinger International, the verdict of public opinion seems to have arrived at a number of conclusions. One is that corporate governance matters.
As we have observed before, under the Conrad Black style of rule and Hollinger’s Black-dominated system of dual class shares, Mr. Black occupied the all-powerful positions of chair and CEO of Ravelston, Hollinger Inc. and Hollinger International, as well as chair of the latter’s executive committee. An unusual number of insiders, some of whom are currently standing trial, sat on the boards of both Hollinger Inc. and its Toronto-based parent —a situation, again, that runs contrary to modern corporate governance principles. Had investors heeded these and other signals, they would have known that Hollinger was a corporate governance train wreck just waiting to happen.
Hollinger’s example makes another compelling case for separating the positions of CEO and board chair, with a strong independent director holding the latter slot. One might have thought when you have a CEO talking about corporate governance “terrorists” on the one hand, looking for the company to pony up more for his butler on the other and announcing, just for good measure, that he was “not prepared to re-enact the French Revolutionary renunciation of the rights of nobility” as Mr. Black did, it would have been time for independent directors either to make some major changes or take a walk.
Hollinger had a further problem, however: a board of apparently disengaged directors. It’s not that they were just asleep at the switch —they didn’t even appear to be on the Hollinger train. They met infrequently and asked few questions. Most directors did not seem to understand, or even care about, the role of Ravelston, the Black-controlled private company to which Hollinger shareholders were paying tens of millions of dollars every year. At least one director, Henry Kissinger, rarely, if ever, showed up. Alfred Taubman was actually re-nominated to the board after his criminal conviction for price-fixing.
Given their inattentiveness and the laxness of their oversight, it is hard to believe that Hollinger directors ever intended to act like a real board. They seemed content to be bit players, and rather unconvincing ones at that, on a stage where Conrad Black had the only voice and the leading part. They appeared to enjoy basking in the glow of the Black empire and its connection with the high and mighty, and seemed to view the boardroom as little more than a fitness club for the exercise of grandiose egos. Unfortunately, they were not unique. There are too many underperforming boards today that are hypnotized by their CEOs in the same way Hollinger directors were apparently captivated by the Black magic of his lordship’s spell.
Here was a company where audit committee members didn’t read this, or missed that or just skimmed something else, and had a chronic inability to ask meaningful questions about the multi-million dollar payments they were approving. It was a level of performance in the boardroom that wouldn’t be tolerated in the mailroom.
This episode should give directors everywhere pause to think about the extent to which they might be placing their own reputations in the hands of a faulty system that could eventually be the cause of major embarrassment. The question is: Will it? There have been plenty of instructive disasters over the years. Hollinger’s bumbling directors might have learned from a whole slew of them —but apparently did not.
There will be some observers who argue that Hollinger is so far off the map that no lessons can be drawn from the trial. This would be a mistake. The same boardroom drama of complacent directors and power-hungry CEOs has been played out many times before. It will be again. All you have to do is look at the huge number of companies where compensation committees are still awarding their top executives with insane levels of pay which often bear no resemblance to reality, where fleets of private jets whose interior luxury would make a sultan envious are routinely provided to the travelling CEO, and where a never-ending list of perks —from lifetime million dollar annual pensions to corporate condos in Manhattan— come as standard boardroom equipment. Most boards don’t even want shareholders to have an advisory say on pay. So you have to wonder who is actually running the show in most boardrooms and how different they really are from Hollinger.
Through the extraordinary prism of criminal proceedings in U.S. federal court, we have been given a view of the inner workings of a corporation that is almost never afforded ordinary investors. The alarming thing is that what you had at Hollinger was not unknown or inexperienced directors, but some of the leading names in North American business and public life. Several of them are still serving as directors of other major companies. When they come off as confused, as inept and as comprehension-challenged as they have in this trial, you have to wonder what else is going on and what other scandals and disasters are just waiting to happen in the companies that still welcome them as directors. Hollinger also shows the workings of the boardroom club. Once inside, you are usually in for life —even if you mess up big-time. It is a very cozy arrangement and one that continues to embrace directors who have lurched from disaster to disaster.
Whatever the outcome of the proceedings in the Dirksen federal court building, what cannot be disputed is that there was something terribly wrong at Hollinger. One of its directors (Alfred Taubman) was a convicted felon. Another key officer and director (David Radler) became a convicted felon. The private holding company that Black and Radler controlled, which featured so prominently in the trial, is an admitted corporate felon, having pleaded guilty in U.S. federal court to mail fraud. Hollinger directors paid out more than $50 million to settle shareholder lawsuits. Canadian heavyweight law firm Torys LLP agreed to pay Hollinger $30.25 million to settle allegations that it provided bad advice in connection with the sale of newspapers. It was the largest settlement of its kind by a Canadian law firm.
Corporate history, such as it is, will have a well-documented case in which to assert its rightful opprobrium against this cast of players. But for Conrad Black, the central figure in this drama, to emerge unscathed from the company he controlled with an iron hand in every possible way, in the face of such astonishing occurrences, would make him the Houdini of the American boardroom. Still, it is possible.
As I have long contended from seeing them in action at many levels over several decades, there is more fiction than fact, more mirage than miracle about the superhuman abilities so often attributed to those at the top. Publicity machines engage in amazing acrobatics to churn out a constantly expanding litany of superlatives and adjectives in describing their clients, but reality — which serves no one’s bidding or generous retainer— often tells a different story.
In this trial, we have had a rare glimpse into the performance of many who have long operated in an Oz-like fashion behind the curtain that prevents public scrutiny, preferring to project from afar the image of their self-claimed greatness. But when they take center stage, the lawyers, the directors, the audit committee members, the executives —all reveal what poor actors they really are, leaving the audience who once viewed them with a mixture of fear and reverence feeling cheated for the shabby performance that was delivered. Sadly, it is a drama that is played out time and again in the world of business and high places. We just don’t get to see it played out under oath very often.
Between the Abbott and Costello performance of Hollinger’s directors, the feebleness, failings and shortcoming of its gatekeepers and the Louis XIV-style email utterances of Conrad Black, the image of capitalism and public confidence in the workings of the boardroom have taken quite a hit.
I don’t know whether Mr. Black and his colleagues will be convicted or acquitted. That’s for the jury who heard the evidence. What is beyond reasonable doubt is the damage that has been inflicted upon the reputation of business and the sense of betrayal that many will once again feel about those who lead major corporations. Even before this trial, there was a widening belief that too many in business are only out for themselves, and that the concerns of ordinary stakeholders have long since vanished from their considerations.
Whatever else it may be, the Hollinger saga has been another valuable lesson for students of business and sitting directors in how not to run a company —and to potential investors in what kind of company to avoid.
We will have some thoughts on Conrad Black and his legacy in Part 2.
There can be few more heart wrenching moments than seeing a loved one racked with pain and being desperate to find them relief —except, perhaps, if you are the person in pain yourself.
In the search for something that would help, millions turned to a new drug called OxyContin, which promised relief without the curse of addiction. My mother was one. Yet it soon became apparent that the medication was not quite the miracle its makers purported it to be. By the mid-1990s, press reports began to raise the possibility that the drug was far more addictive than originally claimed. The death toll from the drug’s overuse began to mount. A whole new class of addicts was created. Court records now show that the drug’s maker, Purdue Pharma L.P., repeatedly and willfully ignored those concerns.
This past week, the company pleaded guilty in U.S. federal court to criminal charges in connection with the deceptive claims it made about the drug. Three of its officers, including its CEO, top lawyer and former chief medical officer, pleaded guilty to less serious misdemeanors. Purdue will pay a fine of $470 million and its current and former executives will pay some $35 million. A further $130 million will be set aside to settle civil claims resulting from injuries and deaths. Nobody is going to prison.
Even in the face of warnings from health-care professionals, the media and members of its own sales force . . . Purdue continued to push a fraudulent marketing campaign,” U.S. Attorney John L. Brownlee said in a justice department press release.
Now, here’s a question: Why is Purdue CEO Michael Friedman, one of the three who pleaded guilty to misdemeanor charges involving “misbranding,” still on the job? The answer lies in the difference —too little considered by advocates of private equity— between a publicly traded company and a private corporation. Purdue is in the latter category. Its web site does not even disclose the names of its executive officers. Its sales are not reported. Its board of directors is not easy to identify. It is, in most respects, a closed, secretive and opaque company. It is also a corporate felon. But because it is a private entity, it is much less influenced by public opinion and the résumés of those in control.
Fortunately, my mother saw the troubling reports about this drug early on and insisted that her doctor take her off the medication. Not all patients were as alert as my mother; many had become too addicted to do anything about it. The company knew it was deceiving medical professionals and vulnerable patients. It did so solely to enhance the profit and wealth of its already well-heeled private owners —names, by the way, the public does not get to see. Billions poured into the company from the sale of this drug, according to court papers.
Like many companies, Purdue boasts on its web site that “Honesty, integrity, and respect for the individual are at the core of our culture.” Its conduct makes a mockery of such values and the company should probably be prosecuted for lying about that, as well.
But there is a larger issue at work here, and it involves the actions of the government itself. When corporate heavyweights have engaged in wrongdoing, such as what Martha Stewart did in obstructing justice or Alfred Taubman did in price fixing at Sotheby’s, they were sent to prison. Nobody died or even got sick because of their actions. In contrast, Purdue not only orchestrated a plan of deliberate deception, but when it became aware of the drug’s damage, it turned a blind eye and continued the scam —over and over again.
Companies are eager to write a check when confronted with their misdeeds. Many insiders see it as a cost of doing business. When executives are sent to prison, however, it tends to elicit a different appreciation for the consequences of wrongdoing.
Individual officers and employees at Purdue made the decisions that took the company down this criminal path —their evil transgressions were not forced upon them. Yet everyone connected with this criminal conduct is free today. Ms. Stewart and Mr. Taubman, on the other hand, will be considered ex-felons for the rest of their lives. There is something terribly wrong when fiddling with the price of antiques can send a man to prison and peddling a drug that is branded in deceit and causes enormous pain and suffering does not even result in a jail door opening, which is why the actions of the U.S. Justice Department in failing to demand prison time for those responsible for the criminal actions at Purdue Pharma is our choice for the Outrage of the Week.
